Regulators line up to crack down on bitcoin

It’s not so much a question of whether bitcoin and other virtual currencies should be regulated.

Rather, it’s more a question of which government agency or agencies should regulate bitcoins and when it will happen. These are just some of the questions that must be answered if virtual currencies have any hope of becoming a mainstream and trustworthy way of paying for goods and services, according to experts who participated recently in a MarketWatch panel discussion about bitcoin in New York.

“There has to be regulation,” said Mark T. Williams, a Boston University professor and critic of bitcoin who was joined by Todd Harrison, the present and founder of Minyanville, and Barry Silbert, the creator of the Bitcoin Investment Trust and the founder and president of SecondMarket, on the panel. “We have to have more regulation. We have to have, in particular, focus on consumer protection.”

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Bitcoin promises a radical overhaul of the financial system. It also carries huge risks for investors. At a recent MarketWatch event, one panelist said: "Bitcoin is the highest-risk, highest-return investment you can possibly make."

Silbert took issue with the notion that bitcoin is not regulated. For instance, Silbert said, the Financial Crimes Enforcement Network (FinCEN) had released guidance, which, in essence, says: “if you are operating basically as a money-changing business, an exchange, you have to register as a money services business (MSB).” And there are rules for MSBs, Silbert said.

Williams, however, disagreed with Silbert’s point of view that bitcoin is regulated. “I will tell you bitcoin is unregulated,” Williams said. “And that is the problem.”

Part of the problem, according to the panelists, is that few know which agency or agencies should regulate bitcoin. And many federal government agencies have taken a pass on proposing regulations, for one reason or another.

According to Silbert, the Federal Reserve, the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC) and the Federal Trade Commission (FTC) are unlikely to regulate bitcoin. The CFTC might propose regulations if derivatives of bitcoin are created, said Silbert.

And then there’s this conundrum The SEC, the nation’s top stock cop, says bitcoin is not a security and issued an alert to investors about the dangers of investing in bitcoin. Read Ponzi schemes Using virtual Currencies. The Financial Industry Regulatory Authority (Finra), which regulates broker/dealers for the benefit of investors, issued a similar release: Bitcoin: More than a Bit Risky.

So which entity or entities will regulate bitcoin? Williams suggested that state banking departments and the Consumer Financial Protection Bureau (CFPB) are in the best position and the most likely to regulate bitcoin. “State bank commissioners are going to regulate it,” said Williams. He noted that a committee of nine state bank commissioners including those from Massachusetts, Washington, California and Florida has been formed to address the bitcoin regulation question.

According to Williams, state banking regulators are the “boots on the ground” needed to put in place regulations. “These are folks that actually have been working with money transfer companies,” he said. “They go through the whole chain of distribution. When you think about the payment system, it’s handled at the state level. So these bank examiners, in particular the state bank examiners, are perfectly aligned for that.”

Williams said several state banking regulators, including David Cotney, the commissioner of banks in Massachusetts, and Benjamin Lawsky, the head of New York’s DFS, are among those taking a leadership role.

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